Hi Blog. On this snowiest of snowy days in Hokkaido, let me send out an excellent writeup from the Japan Times regarding the Japan I first came to know: The Bubble Economy. I first arrived here in 1986 as a tourist, and came to look around for a year in 1987. It was one great, big party. By the time I came back here, married, to stay and work, in 1991, the party was winding up, and it’s been over (especially up here in Hokkaido) ever since. Surprising to hear that it only lasted about five years. Eric Johnston tells us about everything you’d ever want to know in 1500 words about how it happened, how it ended, and what its aftereffects are. If you’re stuck inside today, have a good read. Arudou Debito in Sapporo

With the current global financial crisis, there is much talk in the international economic communities about how to prevent the kind of prolonged slump that hit Japan after the end of the bubble economy years.

Reliving the good times: Women dance on a stage at a one-day revival for Juliana’s Tokyo held at Differ Ariake in Koto Ward, Tokyo, in September.YOSHIAKI MIURA PHOTO

The period between roughly 1985 and 1990 was a time of unparalleled prosperity in Japan. But it was also a gilded age defined by opulence, corruption, extravagance and waste. When the bubble economy years ended, Japan entered a prolonged slump from which it has yet to fully recover.

When did the bubble economy begin and when did it end?

Economic historians usually date the beginning of the bubble economy in September 1985, when Japan and five other nations signed the Plaza Accord in New York. That agreement called for the depreciation of the dollar against the yen and was supposed to increase U.S. exports by making them cheaper.

But it also made it cheaper for Japanese companies to purchase foreign assets. And they went on an overseas buying spree, picking off properties like the Rockefeller Center in New York and golf courses in Hawaii and California.

By December 1989, the benchmark Nikkei 225 stock average had reached nearly 39,000. But beginning in 1990, the stock market began a downward spiral that saw it lose more than $2 trillion by December 1990, effectively ending the bubble era.

What was the cause of the bubble economy?

The dollar became cheaper just as Japan was reaching the height of its economic prowess in manufacturing and at a time when most Japanese had huge amounts of personal savings.

The Bank of Japan had lowered interest rates from 5 percent in 1985 to 2.5 percent by early 1987.

Japanese banks, which had previously lent mostly to corporations, now had ample funds to lend at a time when their major corporate customers were flush with cash thanks to their trade surpluses and the availability of worldwide equity markets, which competed directly with Japanese banks.

So the banks began freely lending to Japanese firms and individuals, who purchased real estate, which increased the paper value of land assets. This created a vicious cycle in which land was used as collateral to obtain further loans, which were then used to speculate on the stock market or to purchase more land. This drove up the paper value of land further, while the banks continued to grant loans based on the overvalued land as collateral.

There was little questioning by either the government or the banks themselves over how the loans would be repaid or what would happen once land values started dropping.

What was Japan like during those years?

For many people, it was one big, expensive party.

The frugality and austerity that defined the country during the postwar era gave way to extravagance and conspicuous consumption. Stories of housewives in Nara sipping $500 cups of coffee sprinkled with gold dust or businessmen spending tens of thousands of dollars in Tokyo’s flashy restaurants and nightclubs were legion.

One nightclub in particular, Julianna’s Tokyo, become the symbol for the flashy, party lifestyle of the entire era.

Japan’s inflated land prices made global headlines.

The Imperial Palace was reported to be worth more than France. A ¥10,000 note dropped in Tokyo’s Ginza district was worth less than the tiny amount of ground it covered.

It was also a period of increased international travel, as Japanese went to the United States, Europe and Oceania in record numbers, shopping for Louis Vuitton and Gucci handbags, Seville Row and Armani suits, and the finest wines.

Trips were often made after dropping millions of yen at English conversation schools in posh buildings with fake Van Gogh paintings on the walls and fish tanks in the lobbies.

The bubble economy attracted Westerners by the planeload, who made fortunes at foreign banks and brokerages, or at least good money teaching English.

Changes in the immigration law in 1990 also allowed Brazilians of Japanese descent to settle in Japan and work in the factories that were facing a labor shortage as younger workers sought higher paying white-collar jobs in Tokyo or Osaka.

What happened after the party ended?

After the crash in late 1990, economic growth stalled and newspapers were filled with stories of businesses going bankrupt.

Corrupt deals involving the yakuza and senior executives at Japan’s largest, most venerable banks and brokerages came to light. Corporations essentially stopped investing and consumers curbed their spending. Housing loan corporations, known as “jusen,” started to go bankrupt, and then the larger banks were forced to merge to consolidate their mounting bad loans.

Various government-sponsored fiscal and economic stimulus measures, including trillions of yen in failed public works projects, did nothing to revive the economy. This led to what has been dubbed Japan’s lost decade, starting roughly in 1991, when the effects of the stock market crash became clear. The carnage lasted until around 2000 or 2001, after the banks had been bailed out with taxpayer funds, much corporate restructuring had taken place and the growth of the Chinese economy provided manufacturers some relief.

How is the bubble era seen today?

Nostalgically by those who remember when they had money to burn, with embarrassment by those who reflected on the attitudes and policies, or lack thereof, that led to it, and with anger by those who see the period as the moment in Japan’s history when the country abandoned it’s traditional moral, social, cultural values and became greedy in an allegedly Western or American sense.

Abroad, economists and bankers see the bubble era and its aftermath as a warning.

In the U.S. over the past few months, media and academic attention has focused on the bubble economy and how it compares with the current situation.

Much of the discussion is on how to avoid the mistakes Japan made that led to its lost decade. Economists in Japan and overseas agree the failure by the BOJ and the Finance Ministry to act quickly in the early 1990s, when it was clear the banks were in trouble, is a major reason for the lost decade.

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I never knew what it was like in Japan during this time. I only learned about it through history books and stories from this land. When I was growing up my family hardly had enough money to live. Our household necessities and personal luxuries were all acquired through thrift stores and yard/garage sales. My family lived in a world where we should be thrifty and shouldn’t waste what could be use again. That sense changed after I met my wife. When I first came here to visit my then future mother- and father-in-law I was a little appalled at the Japanese sense of “buying new.” They seemed like a good family with the exception of this last hangover effect still from the bubble years. That finally changed this year. I’m actually enjoying this new cost-conscious Japan. Just wait; it will get better in time, but maybe not as hard as the 80s and 90s. So, until then, read something good and be patient.

I briefly visited the Bubble Japan when I barely came into my teens. I didn’t notice anything then…I was just too caught up in buying as many of the toys I was collecting in the States without the import sticker shock. Since then, I have learned more about that Japan, the Japan before it, and of course, live in the Japan of now. I agree with what Matthew has said. I, too, came from a family of modest means, yet made the best of it despite the struggle and the scrimping. I find the Japan of today somewhat sad. I look at their consumerist tendencies without real appreciation for what’s really important in life and shake my head. The party has been over for so long, but so many people are still trying to get back to those days, especially people in the government looking to make Ginza land worth as much as it used to be; to go back to the days their gold digging wives could sip $500 coffee while they went out to the nightclubs to throw wads of cash to impress their gold digging mistresses. Everything I have observed so far in my time hear post-Bubble economy points to the signs of people going through withdrawal, but instead of trying to fight “the urge”, they’re doing everything they can to find the next fix. I am really glad that the global economy has nosedived the way it has. It is teaching younger Japanese these days how to do more without. And that can only be a good thing. With the competition in Asia growing from the likes of S. Korea, India and China, Japan needs to take off it’s party cap and get to the serious business of remaking themselves from the consumer economy that it has so long depended upon; it’s time for them to sober up and find new ways to jump start the economy and get Japanese confident again in their own future. I see the potential. It’s a shame most of their leaders don’t.

– Just to be a little contrarian (just a little ), the other extreme of always being of modest means (put it another way, always denying oneself due to lack of money) can make a person mean after awhile. There’s frugality, and then there’s hardship. Frugality can be galvanizing of character. But economic indicators say this could actually be a time of real hardship. If you can’t get a job at any price, that’s gonna hurt beyond a reasonable degree.

My grandmother lived through the Great Depression. She never really got over it. There’s a real mean streak to her, and I’d like to believe it’s not catching.

The “Bubble Japan” described above sounds frighteningly similar to the China of today, with the same materialism and flaunting of social status just for the sake of flaunting (the coffee sprinkled with gold dust reminds me somewhat of businessman in Shenzhen that I knew who would buy 2 new cellphones each month instead of just paying his phone bill).

In fact, some people here actually liken China’s economic growth to Japan’s bubble, but when I remind them that Japan’s bubble eventually burst they always say “wont happen here!” Time will tell, I suppose, but I’m sure they were saying the same thing in Japan back in the 80’s.

I personally have never been to Japan during the “Bubble Economy”, but I did come here during the tail end of the “Lost Decade”. It’s interesting how people say that there is an economic problem here…but having lived here for the last 3 years and working in retail during that time, I can assure you that this “spend spend spend” mentality is not something of the past. Personally, I have noticed a Credit boom; where the majority of spending is put on credit cards. I think that the current economy is headed in the same direct as people now cannot afford the things they want in cash, so they pay for it with credit. The majority of point cards or member cards for stores now also require that you have it coupled with a credit card of some sort.

Bubble Economy something of the past? I don’t think so. I think they just don’t report it as to hide the embarrassment. If you don’t believe me, just head into Sapporo Stellar Place or the Odori area….

Debito, point well taken. Certainly hardship that begins to crush the human spirit is not desired, but when it comes to Japan, a little feistiness would do them some good in my humble opinion. I really hate hearing Japanese say, “shouganai” whenever the government or a company does something that either betrays their trust or victimizes them outright. I tell my friends that in other countries, people would have been busting down the doors of the Diet and stringing up politicians for just half of the things Japanese put up with (gaman suru). So, in your words Debito, I do hope the current conditions will begin to galvanize the Japanese; the future of the country is really riding on it, I think.

I agree with Debito that depressed time have both short and long term effects on the psyche. Frugality is a choice and hardship is not a choice. Frugality usually results in people working together to try to pull out of a bad situation and hardship tends to push people the other way and leads to nationalism and more extreme xenophobism. This is something to be aware of for any person living in a foreign country (not limited to Japan).

As HO points out Japan does have a relatively high savings rate (which is a very positive thing). However during the bubble times the Japanese did have an extreme spending habit (those of us here at that time witnessed this first hand).

In the United States the savings rate is extremely low. The current economic situation in the US was brought on by a combination of things, however in my opionion (and as the statistics show) the biggest culprit are the American citizens for failing to “save for a rainy day”. It is not the governments responsiblity to force people to save.

The spending that has been going on in the US is different than Japan’s bubble. In Japan it was one big party over a relatively short period of time, while the US has been slowly spending itself to death over a longer period of time (less lavish but more spending).

If times continue to get hard and things continue to get worse I could see Japan closing up more (except for the necessary trade) and becoming more xenophobic and the United States (not having the homogenous population and relatively singular mindset) slipping to near anarchy.

I guess for us foreigners (from the US especially) it is a matter of where you want to be and why.

The Juliana Tokyo-bubble connection is actually incorrect because the club did not open until 1991 and came to prominence in 92/93. It was a post-bubble phenomenon. The good times=wild entertainment connection can often be spurious. Sometimes it is hard times that drive escapist hedonism. Many claim they were a driving force in both punk and house/rave music, for example.

While traditional small-town USA runs on making-do and thrift, I recommend any Americans pointing the finger at prodigal Japanese take a look at these videos showing a “trash out” of a foreclosed home in California. Its like so-dai gomi days of old in Japan, except on steroids.

Personally I think there are massive parallels between the Japanese bubble and the USA/UK credit boom of 2002-2007. People saw huge gains in real estate and used them to leverage larger loans and to live it large, blowing the whole thing up bigger in the process. If Hummers, 5000 sq ft McMansions, and plastic surgery aren’t examples of lavish spending, I don’t know what is.